To recap, the acquisition of MIDF by MBSB at a share swap consideration of RM1.01b is satisfied via the issuance and allotment of approximately 1.05b new MBSB shares to Permodalan Nasional Bhd (PNB), the sole shareholder of MIDF.
“This translates to an issue price of RM0.9652 per MBSB share or 0.83x FY22 price book value. Ultimately, PNB would own 12.8% of the enlarged MBSB Group,” said Kenanga Research (Kenanga) in the recent Company Update Report.
While the transaction value could have been on the higher end at PNB’s expense as MBSB traded at 0.5x prior to the deal, Kenanga opines
that the fund had a longer-term stance in terms of incremental value and earnings accretion made possible from the deal.
With the merger, MBSB would shape up to be a full-fledged bank with complete end-to-end banking services. MIDF’s strong suit revolves around development finance, investment banking and asset management.
While MBSB has established a notable presence in the former, it lacks the licence to offer the remaining solutions. The addition of wider corporate and investment banking capabilities could present MBSB as a more desirable financier to SMEs and large corporations, where the group has been aggressively striving to play a bigger role.
Meanwhile, a new asset management unit could open wealth management offerings to retail customers with hopes of increasing their stickiness.
Based on their respective 1QFY23 books, 71% of MBSB’s financing portfolio comprises retail banking while MIDF has only 33%. That said,
MBSB’s total financing portfolio amounts to RM39.2b as compared to RM2.0b from MIDF.
Their respective portfolios reflect minimal overlaps in terms of product offerings and hence could see more complementary benefits. At the same time, it also presents an opportunity to consolidate and optimise backend operating functions.
“Jointly, we could possibly see better top line delivery on the back of more efficient operations. The group opines that it may require at least a year post-completion to sync the two entities before it is able to implement the above-mentioned growth strategies,” said Kenanga.
A successful execution could lead the enlarged bank to come closer to delivering double-digit return on equities, as aspired by the group.
Kenanga believes challenges on the group’s income will persist given its unfavourable fixed-to-variable product mix while credit cost may stretch further to bolster the group’s loan loss coverage ratio.
Investors have rallied strongly on the back of strengthened prospects fuelled by the inorganic growth and synergistic benefits to be
reaped from the nearing completion of the MBSB-MIDF merger.
However, we believe the enlarged group may require some time to implement its strategies to yield its desired growth trajectory.
“Our immediate-term return on equity expectations linger at just above 5%, which indicates that the group’s double-digit target requires a doubling of earnings and a prolonged period to meet,” said the research house.
Risks to Kenanga’s call include lower-than-expected margin squeeze, higher-than-expected loans growth, slower-than-expected deterioration in asset quality, further gains in capital market activities, favourable currency fluctuations, and changes to the overnight policy rate.
